Expanding the Pie With Multi-Asset Funds

Investors seeking to simplify their decision-making and the management of their portfolio often look to mutual funds or ETFs that hold multiple types of assets. Known by various names, including balanced funds, lifestyle funds, managed funds and target-date funds, these funds spread their investments across multiple asset classes—such as stocks, bonds and cash. Some have the flexibility to shift their allocations over time, while others adhere to a set allocation. Most take a "fund of funds" approach, investing in underlying mutual funds or ETFs that fulfill their investment objectives.

More recently, a different breed of multi-asset fund has become increasingly popular. These funds have greater leeway in how their assets are allocated and in the underlying investment vehicles available to them. Beyond stocks and bonds, they are able to invest in a wide array of asset classes, such as real estate investment trusts (REITs), emerging-market debt, master limited partnerships (MLPs) and preferred stocks. Some also offer exposure to commodities and foreign currencies. Multi-asset funds were a popular pick for investors in 2012, posting their 12th consecutive month of positive net inflows in November 2012.1

Multi-asset funds can be an effective way for investors to diversify and broaden their portfolio exposures, providing access to a wider range of investments than might otherwise be available to them. But they often entail increased risks and expenses. If multi-asset funds sound appealing to you, here are some things you should know.

A Literal World of Opportunity

Multi-asset funds allow investors to gain exposure to a globally diverse mix of asset classes and styles in a single portfolio. Although each will vary according to its particular investment strategy and objectives, these funds take a tactical approach, investing across a number of dimensions. Managers of multi-asset funds will typically evaluate the broad range of assets at their disposal, taking into consideration such factors as sources of return, risk exposures and investment styles. Fund managers then overlay issues such as market dynamics, investor sentiment and the state of the economy to assess investment opportunities across various types of assets, applying their insights and expertise to establish what they believe to be an optimal mix.

Beyond establishing an initial asset allocation, multi-asset funds are actively managed, with fund managers adjusting allocations as market conditions or outlooks change. Multi-asset funds have the flexibility to make tactical shifts to address macro- or micro-economic impacts in an effort to achieve improved performance.

Different multi-asset funds can have vastly different objectives. Some, for instance, focus on a specific slice of the market, such as emerging markets. Others seek to address a particular investment objective, such as providing inflation protection or tempering the effects of market sell-offs. Some incorporate short-selling as well as long positions. Some may invest in foreign currency to provide a hedge against the U.S. dollar. Some focus on providing regular income, others on growth. While any particular fund may not provide the full diversification desired in an overall portfolio, a multi-asset fund may make sense in the context of a broader portfolio.

Advantages for Individual Investors

The most obvious advantage of multi-asset funds is the exposure they can provide to a wide range of assets and asset classes—many of which individual investors may have difficulty accessing directly, particularly in smaller accounts. Examples include emerging markets debt, real estate, precious metals and other commodities.

A benefit of using a multi-asset fund to access unusual asset classes is the ease of entry and exit that they provide. Investors seeking broad asset diversification outside of a fund structure would have to look to various sources, requiring multiple trades and ongoing monitoring, as well as needing to address not only market-timing decisions but the potential complexities of tax issues and rebalancing to maintain desired allocations. Within the structure of a mutual fund or ETF, the fund manager makes those decisions, including which assets to overweight or underweight, the duration a particular asset is held, and the specific assets that are acquired.

Another potential benefit to holding a multi-asset fund is the discipline it bestows. Too often, investors have been known to chase asset classes that have offered the highest near-term returns, only to buy in at precisely the wrong time and watch the value of their investment erode. That's not to say that professional money managers don't miss market cycles or make bets on the wrong holdings, but individual investors are more apt to chase trends and end up on the wrong side of a formerly "hot" asset class.

In addition, with fixed-income yields at their lowest levels in decades and ongoing anxiety regarding future Federal Reserve actions, multi-asset funds that focus on fixed income have gained particular appeal. For investors seeking yield, it may make sense to diversify their income sources as broadly as possible.

Understand the Risks and Trade-Offs

A broad multi-asset fund may be an attractive vehicle to gain diversification, and a fund that has the maximum breadth and flexibility to move in and out of assets at different times may be appealing to many investors. But despite their diversification, multi-asset funds often entail a higher level of risk as a result of volatility in their underlying investments. In addition, expenses are likely to be higher than other, less-diversified investment products; and in fund-of-funds structures, expenses are often compounded due to underlying transaction costs and potentially high turnover.

Before investing in any multi-asset fund, you should clearly understand its investment strategy and objectives, the types of investments it may draw upon, and how it allocates its holdings. Examine the fund's underlying holdings to make sure it meets your risk profile, is truly diversified, and makes sense in the context of your overall portfolio.

Although some have been on the market for years, multi-asset funds are relatively new on the investment scene, having gained traction since the 2008 financial crisis. As a result, many have a short track record. But they're gaining visibility, thanks to their introduction in many retirement plan line-ups. As with all investments, how they've performed in the past has no bearing on how they may do in the future.

Schwab offers resources to help investors research multi-asset funds. To explore funds available through Schwab, log in to schwab.com/research, click on the Mutual Funds tab and enter "Multi-asset fund" in the Research box. Click on a fund to learn more about it, including its investment strategy and fund profile (under "Fund Facts & Fees"); asset allocation (under "Portfolio"); and, of course, performance. Multi-asset funds also appear on Schwab's Mutual Fund OneSource Select List®, under "Additional Fund Categories."

Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling 800-435-4000. Please read the prospectus carefully before investing.

Investment value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost.

Diversification does not eliminate the risk of investment losses.

Periodic investment plans (dollar-cost-averaging) do not ensure a profit and do not protect against loss in declining markets.